The incident, which took place in the Xinjiang region of Western China, saw more than 10 people flee from their hiding place after armed police tracked them down.
China says security forces had also killed 28 people from an organisation that carried out a deadly attack in a coal mine in September.
The People’s Liberation Army Daily reported that grenades and tear gas were first use to force the suspects out but when they stayed put, a senior officer ordered: “Use the flamethrower.”
The suspects then left the cave, wielding knives, but they were then “completely annihilated” by the Chinese forces.
Beijing claims to face a serious threat from Islamist separatists in the Xinjiang region, but human rights groups say the Chinese government has never made a convincing case for an organised group of militants.
And the Muslim Uighur people of Xinjiang say their way of life is under threat from the Communist regime – a threat Beijing denies.
Dilate Raxit, a spokesman for exile group the World Uighur Congress accused the Chinese government of using the terrorist atrocities in Paris earlier this month that killed 130 innocent people